China’s silver lining on turbulent global wealth market

Beijing, Nov 2 (Xinhua) As recession is hitting, global wealth measured as household financial assets is expected to shrink by 14 percent from last year’s $109 trillion to $97 trillion this year, reversing a six-year-long upward trend.Emerging markets and China in particular are likely to represent the strongest potential for continued growth in wealth, according to the latest Global Wealth Report 2008 of the Boston Consulting Group (BCG).

North America - epicentre of the financial crisis - and Europe would remain the wealthiest regions but the size of their aggregate wealth, about two-thirds of the world’s total in 2007, was expected to continue dipping in the next five years.

That decline in global wealth is expected to be offset by a sustained annual eight percent growth in the Asia-Pacific (excluding Japan) - the fastest among the emerging economies - as also in the Middle East, Africa and Latin America.

The growth in the two regions together is expected to secure an average rise of one percent in the global wealth annually till 2012.

“Given further declines in the financial markets and the economy, the full impact on global wealth may not have yet been fully observed,” Tjun Tang, partner and managing director of the Boston Consulting Group, said.

He said the recovery of wealth would rely on three factors: economic growth, which is the main driver of wealth creation, investment performance, which is typically driven by equities, and savings rates, which are structurally quite good.

With its 391,000 wealthy households (defined as owning assets worth at least $1 million) possessing together a total of $1.4 trillion in assets, China ranks fifth in the world in terms of millionaires, ahead of many developed countries and only behind the US, Japan, Britain and Germany.

Meagre as it may be if compared to the richest US market which boasts of 4.884 million wealthy households with aggregate financial assets of $17.1 trillion, the wealth market of China was expected to maintain a solid growth momentum in the long term.

“The US and European economies are likely to enter more recession conditions in the immediate term, whereas the Chinese economy will grow slowly but will continue to grow. Many economists are projecting roughly between eight and nine percent GDP growth in 2009 and wealth creation relies heavily on GDP growth,” said Tang.

As the Chinese households tend to stash away larger proportion of cash than other developed markets, wealth in China would hold up relatively better than wealth in the US while stock markets were tumbling down.

Given that the wealth business in China has been much less exposed to the sub-prime debts than in other developed markets, the study covering 62 markets representing more than 98 percent of global GDP concluded that Chinese market will continue to grow.

The country, however, is not completely immune to the unprecedented financial crisis.

Most of the losses, approximately 526.8 billion yuan (about $77.24 billion) or down 20 percent from last year, came from the real estate, steel and export industries which seemed to have borne the first brunt of the financial disaster.

As a result of the declining external demand coupled with the rising yuan, a raft of small export-oriented factories in southern Guangdong Province have been closed down.

Liquidity crunch also caused some foreign companies to axe their investments in China while lingering fear over slowdown has eroded consumer confidence on home turf and already reduced the sales of big-ticket items such as automobiles.

To steer the economy that has recorded double-digit growth for years from recession, China’s central bank has started to loosen credit in the last few months while the ministry of finance pumped heavy investment into the construction of infrastructure facilities such as railways.

Zhang Hanya, a researcher with the National Development and Reform Commission, said the recent adjustments would ease the credit crunch of many enterprises and would be conducive to sustaining consumption growth.

He held that the confidence of the Chinese economy was not only rooted in the huge fiscal revenues the country has accumulated over the past five years but also in the government’s improving abilities to exercise macro-economic control.

Different from those in the United States and Europe, the wealthy in China comprise primarily entrepreneurs who have made their money from rapidly growing industries over the past two decades, said the BCG report.

These established entrepreneurs tend to hold significant levels of cash to provide security and at the same time are highly speculative and have a high tolerance for risk, potentially a characteristic inherited from their entrepreneurial backgrounds.

“China’s wealth management is immature but offers very substantial potential, from both the underlying growth in the financial assets of Chinese households and the rapidly increasing penetration of private banking services into this market,” said the report.